MIDWEST ENERGY OUTLOOK THE ROLE OF COMPETITIVE POWER

SUPPLIERS

ENERGY MARKETS IN TURMOIL

May 17, 2001

Freddi L. Greenberg

MIDWEST INDEPENDENT POWER SUPPLIERS COORDINATION GROUP (MWIPS)

1603 Orrington Avenue, Suite 1050

Evanston, Illinois 60201

Telephone: (847) 864-4010

Facsimile: (847) 864-4037

Freddi L. Greenberg

Executive Director and General Counsel

MWIPS Members

• Aquila • Calpine Corporation• Chevron Energy

Solutions• Coral Energy• Dominion Energy, Inc.• Dynegy, Inc.• Enron Corporation• Indeck Energy

Services

• Midwest Generation• Mirant Corporation• NRG Energy, Inc.• Peoples Energy

Resources Corporation

• PG&E National Energy Group

• Tenaska, Inc.• WPS Power

Development, Inc.

National Trend Toward Competition

• Customer-driven phenomenon• Competition replaces regulation• Wholesale electricity business becomes a

commodity sales business• Wholesale competition offers benefits

even in the absence of retail competition

Regulation v. Competition• Regulated Environment

– focus on regulating profits of the monopoly provider

– the way to increase profits is to increase ratebase

– regulated cost-of-service rates

– over 80 years, the cost structure has risen

• Regulated Environment– focus on regulating

profits of the monopoly provider

– the way to increase profits is to increase ratebase

– regulated cost-of-service rates

– over 80 years, the cost structure has risen

• Competitive Environment– profits regulated by

competitive pressures– the way to be profitable is

to be the lowest cost producer and to offer products that meet customer needs

– market-based rates– shift in risk from

customers to suppliers

• Competitive Environment– profits regulated by

competitive pressures– the way to be profitable is

to be the lowest cost producer and to offer products that meet customer needs

– market-based rates– shift in risk from

customers to suppliers

Electricity Competition: The Basics

Generation Transmission Distribution to Customers

Utility Plant

Merchant Plant

Merchant Plant

(affiliated)

Merchant plants compete to

supply electricity

Non-discriminatory access to transmission system

Monopoly utility continues to own and operate local delivery

system

Utility Generation Affiliate

Utility Plant

Merchant Plant

Merchant Plant

Evolution of Wholesale Competition

Aggregators

Marketers

Utilities/Munis/Coops

Retail Customers

Features Of A Competitive Market

• Wholesale competition shifts risks from customers to suppliers

• Competitive generation equals bid-based generation - generators bid to supply power

• Wholesale competition includes forward markets, day-ahead markets, real-time markets and power purchase contracts

Competitive Market Shifts Risks From Customers to Suppliers

• Price Risk

• Delivery Risk

• Volume Risk

• Performance Risk• Credit/Counterparty

Risk

• Currency Risk

• Regulatory Risk

• Operating Risk

• Technology Risk

• Labor Risk

• Interest Rate Risk

What is a Merchant Plant?

An electric power plant that sells into a competitive wholesale market on a commodity basis without the benefit of a captive customer base or a regulated utility ratebase

An electric power plant that sells into a competitive wholesale market on a commodity basis without the benefit of a captive customer base or a regulated utility ratebase

Announced Merchant Plant Additions

WSCC

53,332 MW (Includes CA)

MAPP2,287 MW

ERCOT29,552 MW

SPP4,893 MW

MAIN25,511 MW

ECAR53,121 MW

SERC48,273 MW

FRCC 12,948 MW

MAAC16,771 MW

NPCC30,437MW

Source: Electric Power Supply Association, February 2001

California

18, 197 MW

The Market will Benefit from the Addition of Competitive Generation

• Investment risk shifts from captive ratepayers to merchant plant shareholders

• New lower cost plants and multiple suppliers put downward pressure on wholesale prices -- leading to lower retail prices

• New technology is cleaner and more efficient

• New products will respond to market demand

• Reliability of the electricity system is enhanced through the addition of new resources

• Electricity becomes a commodity traded on a weekly, daily, hourly basis

HOW CAN STATES ENCOURAGE COMPETITIVE ELECTRIC SUPPLIERS TO ENTER THE STATE?

Streamline permitting process for generation

• Eliminate need analysis

• Eliminate multi-site alternatives

• Objective and defined criteria for approval

• Strict and short deadlines for agency action

• Regulatory certainty is important

HOW CAN STATES ENCOURAGE COMPETITIVE ELECTRIC SUPPLIERS TO ENTER THE STATE?

Access to transmission• Standardized interconnect agreement

• System upgrades to accommodate new bulk power market

• Streamline permitting for transmission

• FERC jurisdiction, but states can have impact

HOW CAN STATES ENCOURAGE COMPETITIVE ELECTRIC SUPPLIERS TO ENTER THE STATE?

Tax equity

• Fuel Tax

• Sales/Gross Receipts Tax

• Revenue sharing to encourage local support

COMMON MISCONCEPTIONS ABOUT COMPETITIVE POWER SUPPLIERS

• They will build only peakers• They will build only gas-fired plants• They will not supply in-state needs, but plan• largely to sell to other states• They will not commit to contracts to supply

power to utilities• They will not consider brownfield sites• They are “out of state” companies with no

vested interest in our state

REALITIES ABOUT COMPETITIVE POWER SUPPLIERS (I)

• They will respond to market signals as to fuel- Competitors do invest in coal plants- Level playing field needed here

• They will respond to market signals as to plant type• Plants are generally sited where capacity is needed

- Transmission access can be uncertain and comes at a cost

- Power markets are increasingly regional Utilities have always bought and sold power from

one another Local system benefits even when power is

exported

REALITIES ABOUT COMPETITIVE POWER SUPPLIERS (II)

• Merchant plant developers will contract for all or a portion of plant output

- They do not need contracts for financing

- Merchant developers will contract for all or a portion of plant output

- Merchant plant developed in response to concern about long term contracts

• They are sensitive to concerns about greenfield sites • An out-of-state company that invests millions of dollars

in a state becomes an in-state “citizen” with a vested interest in the state’s economy

HOW CAN STATES ENCOURAGE COMPETITIVE ELECTRIC SUPPLIERS TO ENTER THE STATE?

Let the market work – “If you open it, they will build !”